NaturalGasStocks.com Features Energy Stocks Update: “Cleaning Up in Energy Services”, at the Insiders Corner by Michael Brush
POINT ROBERTS, WA. May 13, 2005 – www.NaturalGasStocks.com (NGS a global investor website for the natural gas sector, is pleased to offer an updated exclusive commentary on energy stocks: “Cleaning Up in Energy Services. The article is part of the ongoing “Insiders Corner column, by well-known financial writer and author Michael Brush. Mr. Brush also writes a weekly market column for CNBC on MSN Money. Mr. Brush has covered business and investing for the New York Times, Money magazine and the Economist Group.
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By Michael Brush, Insiders Corner
Cleaning Up in Energy Services (NR) (CHK) (IO), posted May 13, 2005
No matter how you do it, drilling for oil and gas is complicated and messy. The energy services company Newpark Resources (NR) makes the task easier — and a couple of patent-protected technologies at Newpark should mean it will make a lot more money on the job in the coming years.
At least thats what insiders are telling you with their buying patterns. In early May, two insiders bought $290,000 worth of stock for $6 to $6.40, according to Thomson Financial.
Thats enough at a small company like this to support a sell-side scenario that projects Newpark stock could rise 25% to hit $7.50 in the next twelve months. Newpark, which recently traded for $6, helps energy producers in three ways.
Energy producers need specialized drilling fluids to do things like stabilize drill bits at great depths, or carry debris back out of drill holes. Many energy companies use fluids that are a mix of oil and salt. They get the job done but they wreak havoc with the environment.
In contrast, Newpark has specialized water- and glycerin-based drilling fluids that dont use oil or salt. So they are easier on the environment. They also happen to make drilling easier and faster, says finance chief Matthew Hardey, because they do a better job of stabilizing drill bits and leaving drill holes in better shape for production. So we have been able to capture significant market share working against competitors, says Hardey.
This might help explain why the company thinks drilling fluid sales will grow 50% to $432 million in 2005. (Overall revenue for the most recent quarter was up 24% to $129 million.) Newpark also has a lot of room to expand abroad. Drilling fluids make up the biggest part of Newparks business, accounting for over 50% of revenue.
Door mats for oil rigs
Because drilling takes place in harsh conditions and undeveloped locations, production companies need to create temporary access roads and a stable footing around sites for heavy equipment. To do so, they rent or buy specialized wooden or plastic matting from Newpark. Use of matting is growing in Canada especially, as producers move further north into tougher terrain. This segment brings in over 20% of Newparks revenue.
Increased drilling has sparked healthy growth in both of these business lines in the past year. But it also means Newpark can raise prices. Drilling fluid prices were up over 5% in the past year, but matting prices rose by more than 25%. Much of that extra revenue falls straight to the bottom line.
Waste clean up
This is the smallest part of Newparks business at about 15% of revenue and growth has been disappointing. But all that could change, thanks to a proprietary purification technology Newpark has licensed from a Mexican company. The technology uses ultrasonic sound waves to tweak chemical reactions used in the clean up of dirty fluids that are a byproduct of energy production.
The technology will be rolled out at two sites in Wyoming this year. But because the technology can clean up fluid without affecting its temperature much, it could be a big hit at energy companies producing oil from Canadian tar sands. In a process called steam assisted gravity drainage, energy companies use steam injections to produce oil from Canadian tar sands. With our technology, we can make fluid reusable and put it back into their boilers at high temperatures, says Hardey. This makes the process faster and cheaper. Down the road, the technology may be used by utilities to clean up emissions at coal-fired plants.
Revenue from this technology wont really start to kick in until 2007 but it could be big in the long term. The company will learn more as it carries out tests in Canadian tar sand production this summer. It is hard to project the path for the new water business, but it could be the most significant driver of growth at Newpark for the next ten years, says Hardey.
The bottom line: Caylon Securties has a 12-month price target of $7.50 for the stock, or 22 times expected 2006 earnings of 35 cents per share. Given the upturn in drilling activity and Newparks proprietary edge, that could be conservative.
Insider update: In early May insiders at Chesapeake Energy (CHK) bought $20 million worth of stock at around $20 per share. Insiders at Input/Output (IO) purchased $370,000 worth at $5.90. These purchases confirmed earlier bullish signals at these energy companies, which you can read about here: http://www.investorideas.com/insiderscorner/Articles/Four_Natural_Gas.asp; and at this link: http://www.investorideas.com/insiderscorner/Articles/Seismic_Imaging.asp.
Disclaimer: At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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